NYSE Becomes First Major Exchange To List Cannabis Company With Acceptance Of REIT IPO

A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Monday, Nov. 21, 2016. Photographer: Michael Nagle/Bloomberg

The race to be the first cannabis company to list on one of the major stock exchanges is over.

The New York Stock Exchange has approved the initial public offering ofInnovative Industrial Properties, a real estate investment trust that plans to invest in medical marijuana properties. Since marijuana is still federally illegal, the New York Stock Exchange could be breaking its own requirement not to list companies that aren’t in compliance with the law.

This is why most marijuana companies are publicly traded at theOver-The-Counter market, where there is little concern over a company's business as long as it files the proper paperwork. That's not the case at theNasdaq or the New York Stock Exchange, both of which conduct strenuous reviews of potential clients. Neither would comment on this story.

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Year-to-date, IPOs are down 42% from last year. This decline in business has affected both exchanges. Could the exchanges be willing to ease their rules in order to bring in new business?

Innovative Industrial Properties filed to go public on Oct. 17 and chose the New York Stock Exchange as its home. At the time of the filing, the NYSE would only share its filing review process and would not comment on the filing request. The review process states that “companies must be in compliance with the law.” On Nov. 17, the REIT confirmed it had been approved, although the NYSE still won't discuss the listing.

NYSE may have found comfort in the company’s top management. Executive Chairman Alan Gold co-founded two NYSE-listed REITs,BioMed Realty andAlexandria Real Estate. An affiliate of The Blackstone Group purchased BioMed for $8 billion earlier this year and Alexandria is currently listed at the NYSE under the symbol ARE. So, they have worked with Gold before and maybe that is why they were willing to take the risk.

Cannabis social media company MassRoots also doesn’t “touch the plant,” but they were rejected for an uplisting by Nasdaq. Chief Executive Officer Issac Dietrich said, “We went to Maryland to meet with the Nasdaq listing people and their main focus was on the risk factors.” Dietrich said the company was very transparent that some business people could accuse them of aiding and abetting criminal activity.

“They were a little uncomfortable with that risk factor. They spent six weeks reviewing the application and then told us they were not willing to move forward,” said Dietrich. “They didn't want to be a trailblazer.” He is hoping that since the NYSE has accepted IIPR, it will give them more comfort.

One doesn’t normally think of the NYSE as a trailblazer.

This might not have been a problem when the company filed in October, when many believed Hillary Clinton was going to win the race for president. However President-elect Donald Trump has appointed Senator Jeff Sessions as Attorney General who is staunchly anti-marijuana and likely to be approved. He could roll back theCole Memorandum, which has given the green light for marijuana businesses even as it remains federally illegal. The Justice Department did not respond to questions about that possibility. If the new administration is willing to reverse Obamacare, trade agreements and Roe v. Wade, it isn’t unrealistic to think they could crack down on cannabis again.

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This could put the exchange in the regulatory crosshairs for listing a company they know is associating with law breakers.

It is a grey area for the exchanges. Where do they draw the line between the company and the company's customers? While IIPR may not technically be engaged with cannabis, they are knowingly renting their building to a cannabis company that is violating federal law.

It has cost Innovative Industries $100,000 to list with the NYSE. The San Diego, California,-based company plans to raise $175 million and will offer 8.75 million shares at a price of $20 a share. This gives IIPR a valuation of $202 million. So far it doesn’t own any buildings, but it is in agreement with PharmaCann to buy their New York medical marijuana facility for $30 million, which should close in the next couple of months. So, technically since it doesn’t own the building yet, the NYSE hasn’t done anything outside of their rules.

The risk factors are clearly outlined in the IIPR filing which states, “Medical-use cannabis remains illegal under federal law, and therefore, strict enforcement of federal laws regarding medical-use cannabis would likely result in our inability and the inability of our tenants to execute our respective business plans.”

“The IIP listing on the NYSE is every bit as important to the cannabis movement as the Rohrabacher-Farr Amendment barring the DOJ from spending federal funding to enforce the Controlled Substance Act against responsible medical cannabis licensees, or the commitment of Scott's Miracle Gro to the cannabis industry,” said Jeremy Unruh General Counsel of PharmaCann. He added, “IIP's publicly-traded REIT will be the very first opportunity for institutional investors to comfortably generate exposure to an industry that currently lacks the sort of transparency that SEC oversight provides.”

“Financing is challenging for marijuana companies and we had millions tied up in this building,” said Unruh. “A lease-back transaction was one way to loosen up capital.” Unruh, like others in the New York market are hoping the state loosens up its patient restrictions in order to increase the patient population.

Unruh said, “I know the IIPR guys are in their silent period, but Alan Gold and Chief Executive Officer Paul Smithers have a tremendous track record in the bio-med field. I believe it will translate well into medical cannabis.” IIPR hasn't entered into any other binding contracts or commitments for any other buildings.

The major credit card companies MasterCard and Visa do not draw this line, nor do the major banks. They will not accept customers if they believe they are even remotely promoting the use of marijuana. One marijuana research website had its bank account closed by a major bank because it provided a link to a dispensary discount coupon. The website only conducts research and was shocked that their account was closed.

The exchange could argue that it doesn't police any of its REIT customers as to their real estate holdings. Similar to the situation with the pharmaceutical companies,GW PharmaceuticalandInsys Therapeutics, both of which use the cannabis plant as a foundation for their drugs. These two companies are viewed as biotech companies, not necessarily as cannabis companies. This distinction has given the Nasdaq comfort in listing them. The exchanges are probably not going to make a judgment call on the compounds that a biotech firm uses for its drug manufacturing.

Earlier this year, the Toronto Stock Exchange reversed its stance and took the plunge and uplisted theCanopy Growth Company, which actually produces marijuana and will use the symbol WEED.

“The exchanges are taking this very seriously,” said Mass Roots Issac Dietrich. “It's a real industry, but they don't want to put the exchange at risk.” It looks like the New York Stock Exchange is willing to take the risk this time and beat the Nasdaq in the race to list a cannabis company.